Comoment risk in corporate bond yields and returns

Abstract

AbstractIn this article, we provide a comoment factor analysis of corporate bond returns using sector indices. We split returns into systematic default risk premiums rewarding for default risk exposure, and net excess returns adjusting for market conditions. Higher comoments contribute positively to systematic default risk premiums, whereas covariance and cokurtosis lower net excess returns as they trigger value losses. The positive coskewness effect, more pronounced during low yields, corroborates the “reach‐for‐yield” phenomenon. The gradual substitution between covariation and tail risk contributions to the systematic default risk premium for higher maturities suggests a shift from the pricing of downgrading to outright default risk.